Review -- The Hidden Wealth of Nations: The Scourge of Tax Havens

When the Panama Papers were leaked in May of 2016, the scheming of the super-rich to avoid paying taxes by hiding their identities offshore was thrown into headlines around the world. Some journalists, scrambling to make sense of the 11.5 million documents, set about trying to uncover the identities of the shadowy figures behind the web of deceit, while others valiantly tried to explain the complex financial mechanisms. What the public needed was an overview by an expert, a clear analysis of how tax havens work, in simple language, with enough detail to make the picture complete yet without being too technical.

In The Hidden Wealth of Nations: The Scourge of Tax Havens, Gabriel Zucman has done that brilliantly—and much more. Eschewing scandals and the naming of individuals, he provides a clear description of how the system works, revealing, perhaps surprisingly, that it is, at its core, rather simple. But he goes much further, calculating the true extent of tax evasion, in dollar terms, by crunching publicly available economic numbers in ways that have not been used before. (Tax evasion, in his analysis, includes what lawyers call “tax avoidance,” the legal exploitation of loopholes, since both evasion and avoidance exist only to dodge the taxman.) He shows that more than 8% of global financial wealth, consisting of stocks and bonds, shares in mutual funds, and bank deposits, is hidden from tax authorities, amounting to 7.6 trillion dollars. That enormous figure is a minimum, because it does not include non-financial forms of wealth such as real estate, gold, jewelry, art, etc. Now that governments are at long last in possession of real numbers, they are much better placed to address the problem of tax havens and lost taxes. Finally, Zucman presents a simple plan for bringing global tax cheating to an end. It’s a breathtaking achievement to do so much in a book consisting of only 120 pages. But is it to be believed? In the foreword no less a luminary than Thomas Piketty, author of the monumental Capital in the Twenty-First Century, calls The Hidden Wealth of Nations “probably the best book that has ever been written on tax havens and what we can do about them.”

While the book is certainly an important handbook for policy makers, and while it might yield deeper insights to readers with a background in business and finance, Zucman has written it with the layperson in mind. Because governments, he says, “have not been stellar” in fighting the scourge of tax havens, an informed and mobilized public is needed to drive the campaign against tax havens to its conclusion.

What do his numbers reveal? Nine percent of Canadian financial wealth or US$300 bn is held offshore by Canadian citizens, resulting in an annual loss of US$6 bn in tax revenue. If back taxes were collected and penalties assessed for not declaring assets, the government would reap an enormous windfall. Even more, these numbers do not include losses incurred when governments had to lower tax rates to slow the flight of capital to tax havens. Four percent of U.S. wealth is held offshore, representing $1,200 bn in annual lost tax revenue. Ten percent of the financial wealth of Europe is held offshore, depriving European governments annually of $87 bn. The numbers for Russia show the extent of the oligarchy, with 52% of financial wealth held offshore. Sadly, Africa, which needs its tax revenue sorely for basic services and development, has 40% of its financial wealth hidden from tax authorities.

After tracing the history of tax havens from the end of World War I, when governments instituted progressive taxes in order to offset their huge debts and provide benefits to veterans, and following a chapter on the failed efforts of governments to address the problem of tax havens, Zucman proposes a straightforward solution, a global financial register. Such a record, listing who owns all financial securities in circulation—all stocks, bonds, and shares in mutual funds worldwide—perhaps managed by the IMF, would strip tax cheaters of their anonymity and enable nations to collect the taxes due to them. Reporting must be automatic, leaving bankers in tax havens with no discretion to falsify information about their clients, as Swiss bankers did on a huge scale at two critical points in the past. Also because of past failures to eliminate tax havens, Zucman insists that countries tempted to continue operating as tax havens must be compelled to participate through sanctions. In plain economic terms he demonstrates how the threat of carefully crafted trade tariffs against recalcitrant countries, designed to capture lost tax revenue, would leave tax havens no choice but to surrender, and he points out that such a move is allowed under current treaties.

Fiscal dissimulation does not end with wealthy individuals; there is also the problem of corporations avoiding taxes through profit shifting. Various accounting tricks are used to ensure that branches in high tax countries show little or no profit, while most of the company’s profits show up in countries with low taxes, Luxembourg being a favourite destination because of its “modest”`corporate tax rate of 0%. Again Zucman provides numbers: 55% of foreign profits of U.S. firms are declared in tax havens; and U.S. tax losses amount to 20% of all U.S. profits. Rather than asking governments to play cat and mouse with the corporations over their profits (the tax department of GE consists of almost 1,000 employees), Zucman proposes that corporate profits not be approached country by country; rather, the worldwide profit of a corporation should be calculated. Each country would then be assigned a weighting based on sales, capital, and employees, and based on its weighting the country could then assess taxes according to the rate of its choice. This corporate solution, he explains, would be easier to implement than the global financial register for individuals. He even proposes a method for ensuring that corporations would pay up.

For all his proposed solutions, Zucman preempts objections that they are “utopian” by demonstrating how they are currently operating successfully in smaller jurisdictions.

The big surprise about large-scale tax dodging is how essentially simple it is, resting entirely on anonymity, and how relatively straightforward the solutions are. While the G20 summit in 2009 made a good, if unsuccessful, effort at eliminating the scourge of tax havens, Zucman`s book may make it possible that we truly will one day see the much sought-after “end of banking secrecy.”